For fast-moving consumer goods (FMCG) retailers, an
enterprise-wide investment in radio frequency identification
technology based on case and pallet tagging will not generate
enough revenue to significantly add to the bottom
line.
The best justification for the multimillion-pound expense is to
lay the foundation for creating and acting on real-time demand
signals that the technology will create.
Retailers are investigatingradio frequency identification,
spurred on by high-profile pilots from companies such as Wal-Mart,
Target, and Metro AG and supplier promises of directreturn on
investment opportunities and improved operationalefficiency.
AMR Research developed a model to outline the return retailers
can expect as they move from pilot project investments to an
enterprise-wide RFID infrastructure. Based on a three-year,
company-wide roll-out for an FMCG retailer with £5bn in annual
sales that embraces case and pallet tagging, our analysis
demonstrated that the retailer would not generate enough profit in
a reasonable, multi-year timeframe to cover the cost of the
investment.
As a result, companies will have to decide if other benefits
make the technology worth the expense. Organisations in other
retail categories should use this model to help decide where and
when an RFID investment may make sense for them.
Although many retailers believe that RFID technology will
eventually transform their supply chains and make their operations
more efficient, the reality is that even leading retailers have not
been able to develop a clear-cut case for moving forward from
research investments or pilot projects to an enterprise-wide
roll-out of the technology.
Today, RFID systems promise tremendous long-term benefits, but
present near-term hurdles. Tags remain too expensive (primarily for
suppliers and manufacturers); immature technology - from readers
that will not function at forklift and conveyor speeds, to the
dearth of RFID data analysis tools - limits the usefulness of the
data; and existing business processes, organisational behaviour,
and established IT infrastructure must be overhauled to take
advantage of the new technology.
With so many obstacles in the path to wide-scale RFID adoption,
why are retailers moving forward?
Supplier collaboration
RFID, when combined with integration technologies, promises to
deliver real-time demand data from the retailer to the
manufacturer. This data can help retailers and manufacturers
optimise inventory, reduce logistics costs, and react more quickly
to changes in consumer buying patterns. This real-time data will
form the foundation for a demand-driven supply network, a key
capability for organisations to compete successfully.
Reducing stock shortages
Many retailers have directed technology and resources at the
out-of-stock problem for years, but they have only seen minimal
improvements and continue to suffer lost sales as impatient
customers spend their money with well-stocked competitors.
RFID technology promises to tie tagged goods directly to
replenishment systems, eliminating or reducing the industry's 8%
average out-of-stock rate - a figure that can jump to 18% when a
product is promoted. A true understanding of inventory visibility,
both on the shelf and in the backroom, would enable retailers to
avoid many stock shortages, or at least mitigate the impact of
having insufficient product.
Cutting labour costs
An enterprise-wide RFID infrastructure will rely on automated
systems that increase store and distribution centre accuracy and
efficiency. By automating these systems, retailers can reduce the
number of man hours dedicated to manual shipping, receiving, and
inventory activities and redeploy store workers to more high-value,
customer-centered functions. The ability to automate these
functions is particularly appealing to retailers with high employee
turnover.
Keeping pace with Wal-Mart
Wal-Mart's high-profile RFID programme, which began with
mandates to its top suppliers taking effect in January 2005, and
its historical approach of continuously improving operations and
logistics, tends to dominate the discussion of RFID in retail.
Given Wal-Mart's successful track record of gaining operational
and financial improvements from new technology and key process
changes, many retailers feel they cannot afford to miss out on a
solution that an industry leader is aggressively pursuing.
In-store experience
Some retailers are interested in using RFID to improve the
shopping experience, thereby increasing sales, improving customer
satisfaction and creating a unique brand experience.
For example, a retailer might use strategically placed readers
to quickly locate items a shopper is interested in, or develop a
"magic mirror" system that allows a shopper to superimpose
RFID-tagged clothing over a digital representation of themselves,
allowing customers to visually mix and match garments without
trying them on.
Although the motivation for experimenting with RFID varies by
retailer and industry segment, there is some common rationale
surrounding what retailers are not interested in pursuing with
RFID, at least in the short term (see box).
Retailers should not expect a return on investment from
implementing RFID at the case and pallet level. Although the
promise of improved supply chain visibility, deeper data analysis
and expanded automation still exists, broad case and pallet-level
RFID will not generate profits in the near term.
It will take years of effort, experimentation, and commitment to
change technology and culture to gain the maximum value RFID
technology can provide.
A number of retailers have chosen to follow a more established
and proven approach to obtaining these benefits, using technology
such as demand forecasting systems, supplier collaboration tools,
and new replenishment and retail planning applications to create
both stock improvements and enhanced customer satisfaction.
In the end, it will be the combination of these activities that
will revolutionise retail supply chains and in-store performance.
RFID technology has the potential, when fully deployed, to enhance
the demand, planning and supplier collaboration efforts critical to
effective retailing.
What retailers are not doing with
RFID
Retailers want different things from RFID, but what
many have in common is what they are not taking on board.
Universal item-level tagging
Most retailers are investigating the impact of case
and pallet-level tagging, but there are only a few instances of
retailers investigating the more expensive tagging of individual
merchandise. Moreover, the concept of store-wide tagging of all
products is a decade or more away. To date, only items with
relatively high value, such as DVDs, video games, consumer
electronics, pharmaceuticals and high-end apparel, are seen as
viable targets for individual tagging.
Electronic proof of delivery
No retailers are deploying RFID tag reading in
distribution centres and stores as proof of delivery, despite the
fact that several manufacturers have said this single use of RFID
could justify their investment.
Delivering supplier edicts
Although Wal-Mart's second RFID mandate is
approaching - one that has an impact on a second tier or smaller
suppliers - most retailers are taking a more cautious,
collaborative approach to their partners. This group of fast
followers is exploring RFID, but it is more willing to share
detailed business cases and project plans and is more flexible
about the stock-keeping unit tagging requirements and roll-out
dates.
Scott Langdoc is vice-resident of retail research at AMR
Research. Research director Kara Romanow also contributed to this
article